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Counter arguments
The counter argument is to emphasise, as the report does, that airlines have sunk costs at particular airports, that they are faced with high switching costs and therefore are vulnerable should an airport exercise pricing power. But aiports too have sunk costs and are potentially vulnerable in the new era to possible capricious behaviour by airlines exercising their new found freedom of establishment. Fortunately, the world of commerce has development a mechanism for dealing with this problem. It is for the respective parties to negotiate a contract securing their respective long-term positions and there are now many examples of contracts between airports and airlines which stipulate prices, qualities of service and a commitment to invest on the part of the airport and to base aircraft on the part of the airline 5. As for switching costs, about which the report states: “It is well known that [they] are high” (162), there are numerous examples of the new European airlines closing bases and transferring aircraft to alternative locations in Europe. And some of Europe’s legacy airlines have also switched substantial operations between bases: BA moved a large tranche of its operations from London Heathrow to London Gatwick in the early part of the last decade and then, after a few years, moved back again. More to the point, the alliance between Air France and KLM has seen the realignment of long-haul services between Schiphol and Charles de Gaulle on a significant scale. Bear in mind here that economic behaviour responds frequently to changes at the margin; pricing discipline can come from relatively small changes in market s hare (or even from threats that such changes might occur) 6.
If it can be argued that for the downstream airlines the relevant geographic market is Europe-wide the same cannot be said for O&D passengers using Schiphol and it is in this market that market power might have greater significance. For passengers the study identified as many as nine substitute airports for Amsterdam, two of which were large and three of which had emerged as competitors relatively recently. The latter development emphasises the dynamics of the market and suggests that too much focus on whether competing airports currently have competing routes is not particularly helpful in the final analysis. Of greater significance is the marked reaction to the introduction of the recent ‘Air Passenger Tax’ which can be viewed as a proxy hike in Schiphol’s charges. The tax take was 220mn. euros but the economic damage to the airport as a large proportion of the O&D traffic moved elsewhere, was estimated at close to 1bn. euros (262). This speaks volumes about the limited ability of Schiphol to exploit market power. Moreover, the ramifications would have been that much greater if this quasi-price increase had applied to Schiphol only and not to all Dutch airports equally and also if Eindoven and Rotterdam, jointly owned by the Schiphol group, were in a position to compete freely and effectively with Schiphol. But, as the study noted, the joint ownership “...limits potential competitive pressure from these airports...leaving Schiphol with a certain amount of market power” (363; see also 200,274). Before deciding upon the continued regulation of Schiphol, therefore, a review of industry structure would seem to be an imperative.
Conclusions
Finally, the conclusions of the study have an intriguing implication. Schiphols supposed dominance in the provision of infrastructure services is mirrored by the KLM group’s apparent dominance of air services at the airport, where it has a 60 per cent share of the market. This begs the question, to use the economics jargon: is there here a case of double marginalisation? If Schiphol acts as a monopolist is it not reasonable to suppose that KLM does so too, bearing in mind that the market power of both derives from the same final product market? Therefore, should not NMa commission a further study addressing airline market power? If such a study was to use the tools of analysis and prescriptions used in this study, I have a good idea of what the outcome would be.
David Starkie is the author of Aviation Markets: Studies in Competition and Regulatory Reform, Ashgate/IEA, 2008.
1. Numbers in parenthesis denote paragraph numbers in the report.
2. Note, however, for companies offering ground handling and other services, “Schiphol Airport controls access to infrastructure and has significant market power, although it currently charges no access fees (with the exception of concession fees for refuelling)” (55). Thus, in this domain at least, market power does not appear to be exercised.
3. Jaap de Wit, The privatisation and regulation of Amsterdam airport Schiphol, London, in: Peter Forsyth, David Gillen, Andreas Knorr, Otto Mayer Hans-Martin Niemeier (ed.) The economic Regulation of Airports, Ashgate 2004
4. The so-called Low Cost Carriers now account for about half the passengers carried within Europe.
5. Let it be thought that that such contracts are restricted only to low cost airlines using small airports, it was reported in 2009 that the major Australian gateway airport, Sydney, had 5 year contracts in place with all its major users. Many similar contracts are in place at major European airports such as Manchester.
6. Hence emphasis added to the quote above taken from 21. See also 525 where it is said to be “...unlikely that a critical mass of airlines would leave Schiphol...in case of a charge increase...” (emphasis added).
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